Chung Inc. is considering the replacement of a piece of equipment with a newer model. The...
Question:
Chung Inc. is considering the replacement of a piece of equipment with a newer model. The following data has been collected:
| Old Equipment | New Equipment | |
|---|---|---|
| Purchase price | $225,000 | $375,000 |
| Accumulated depreciation | 90,000 | - 0 - |
| Annual operating costs | 300,000 | 240,000 |
If the old equipment is replaced now, it can be sold for $60,000. Both the old equipment's remaining useful life and the new equipment's useful life is 5 years.
Which of the following amounts is irrelevant to the replacement decision?
Relevant cost to replace the equipment:
The equipment is replaced due to obsolescence or change in technology or decreased efficiency. The relevant costs are which are incurred in the future and are variable in nature. The sunk cost are identified and not taken in decision making of replacing the equipment.
Answer and Explanation: 1
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View this answerThe sunk cost are fixed cost which have already been incurred and cannot be changed are the irrelevant to the replacement decision
The book value of...
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Relevant Costs to Repair, Retain or Replace Equipment
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Chapter 9 / Lesson 11
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A business or commercial entity will have to update or make changes to their equipment in the way of retaining, maintaining, or replacing it. Learn more about making changes to equipment for a business, the relevant costs, fixed and variable costs, and the effects of sunk costs.
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